Global pension funds eye Indian startups

NEW DELHI: Soon after Snapdeal closed a $500-million (about Rs 3,300 crore) fundraising round led by Foxconn, Alibaba Group and SoftBank, another unlikely investor was making moves to acquire stakes in the e-commerce company.
Ontario Teachers' Pension Plan (Teachers), Canada's largest single-profession pension plan with an investment portfolio of over $152 billion, avoided the scramble to get on board Snapdeal's rapidly expanding cap table.Instead, it acquired shares in Snapdeal from some of its investors, providing Saama Capital, Ebay and Sequoia Capital with complete or partial exits, a rare occurrence in the country's consumer internet sector.
The transaction was the only the first by a global pension fund in an Indian ecommerce company, highlighting the increasing attractiveness of the consumer internet sector even for long-term, conservative investors such as pension funds and endowments.
These entities typically put their money in safe investment avenues such as S&P 500 index stocks, debt funds and bonds, or in promising companies through private equity or venture capital funds to mitigate risk. That pension funds and endowments are now willing to invest directly in Indian consumer internet firms presents a worthwhile and steady alternative just as funding slows for companies seeking growth capital.
"Pension funds don't just want to invest in bonds that will give them single percentage point yields," said Raja Kumar, founder and chief executive of private equity firm Ascent Capital. "They want alpha, which makes investing in India a no-brainer."
Consumer internet funding in India is dominated by venture capital, private equity and hedge funds, and lately, strategic investors, who have poured in billions of dollars but are yet to see tangible returns. In the first nine months of 2015, India's consumer internet sector scored funding of about $4.3 billion across 152 transactions, according to ETtech Data Labs.
"The story is finally happening," said Vijay Shekhar Sharma, founder and chief executive of Alibaba Group-backed ecommerce firm Paytm. "Any venture that has a hedge fund as an investor will prefer having longer-term investors on board."
Canada Public Pension Investment Board (CPPIB), Lockheed Martin's pension fund and a few other such entities are in talks or actively scouting for potential investment opportunities in Indian consumer internet firms.
"Pension funds are a large pool of capital that are naturally targeted by large ecommerce companies in India, which are achieving scale," said Vikram Gandhi, founder of investment bank VSG Capital, which was senior adviser for CPPIB in India. "Unlike other investor classes, pension funds have a long-term view and do not keep moving in and out."
A number of US-based university endowments, including those of Harvard University and Columbia University, have also held talks with Indian consumer internet firms, mostly to buy stakes in them from their existing investors.
"It really opens up the secondary market in India, especially for funds that are coming to the end of their lifecycle and need to close," a senior executive with a large consumer internet company said, speaking on condition of anonymity as his firm is in talks with pension funds for capital.
The biggest advantages for consumer internet companies in India in having such investors on board are their deep pockets, long-term outlook and their heft, which can come into play as and when a company decides to list its shares in stock exchanges.
"Pension funds and endowments can have holding periods of over 10 years, and provide a massive recommendation to future investors, especially during an initial public offering," said Vineet Toshniwal, managing director of Equirus Capital.
And unlike VC and PE investors, it is rare for pension funds and endowments, in spite of their large investment ticket sizes, to ask for board seats or a say in management strategy. "They do their due diligence and see the pattern. They are fine with information rights. It's more about the placement," said Paytm's Sharma.
It is unlikely, however, that there will be a deluge of investments from endowments and pension funds, given their conservative investment strategies. "The appetite is for later-stage ventures. There will only be a handful of deals, because only a few companies have achieved scale," Toshniwal said. "Companies will have to show some real traction to attract the pension funds."
Also, having such long-term investors on board could encourage companies to delay going public as can now afford to slow their constant cycle of fundraising. "IPOs are the last resort to raise money. It's always better if you can raise it privately," Sharma said.
Pension funds and endowments aren't the only long-term investors to bet on Indian consumer internet ventures. Sovereign wealth funds such as the Singapore government's GIC and Abu Dhabi Investment Authority have pumped money into Flipkart and Snapdeal, the country's largest online marketplaces. More recently, Malaysian government-backed Khazanah Nasional Berhad led a Rs 250-crore funding round in online lingerie retailer Zivame.
"Funding in the consumer internet space has been dominated by PE and VC funds. But now long-term capital is making an entry, and they aren't afraid to open their wallets, and also stick around," said Ascent Capital's Kumar.